SMSFundamentals | Aug 12 2013
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This article was first published for subscribers only on 27/07/13 and has now been opened to general readership.
By Greg Peel
The 15th edition of the annual Long-Term Investing Report, commissioned by the Australian Securities Exchange (ASX) and prepared by Russell Investments, indicates that from an Australian investor’s perspective, Australian equities have outperformed all other traditional asset classes over both the past ten and twenty-year periods to end-2012. This is despite the odd significant setbacks over the past five years.
Two major themes dominated the investing landscape over these periods, being the resource sector boom, which has fed into a strong performance from the wider domestic economy, and falling bond yields (rising bond prices), are not themes expected to be repeated over the next ten to twenty years. Hence Russell Investments believes that Australians need to take a more active and diversified approach to investment going forward.
The “mining boom” of the noughties was by no means the first Australia has enjoyed, indeed the resource sector has reliably cycled through boom and bust periods throughout history. In the last nineties, mining in Australia was all but moribund. It was nevertheless a significant boom in that it represented the emergence of China as a global super-economy – something which does not happen very often. Japan made a similar debut onto the global landscape in the sixties and seventies, and perhaps one day India might get its act together, but to borrow from the famous words of a reasonably successful Australian businessman, “Son, you only get one China in your lifetime”.
Not to say that China will now cycle down. It’s just that China has now moved from “emerging” to “emerged”, and is edging closer to “developed”. The spectacular growth phase is over and a merely steady growth phase is underway which will still see China overtake the US as the world’s largest economy in a decade or two to come. Australia will still sell China plenty of rocks, and other resources. For Australia, it’s now the “production” or “volume” phase rather than the now peaked “capex” phase.
Bond yields have not just been falling for the last ten and twenty years across the globe, but for the last thirty. This means that bond prices have accordingly been rising, and investors in bonds have enjoyed three decades of success. For that they can thank Paul Volcker, Fed chairman during the Carter and Reagan administrations. After the US (and Australia) endured a decade of runaway inflation in the seventies, exacerbated by two oil shocks, it was Volcker who decided the central bank mandate of implementing monetary policy to boost/restrain economic growth as required was of little use unless the mandate extended to keeping a lid on inflation. Central banks across the developed world adopted the same approach.
Agonising over whether the RBA might cut by 0.25% to 2.50% next month? My first mortgage cost me 13%, and I’m sure many of you can empathise.
We now have central bank cash rates across the globe which are effectively in the negative (zero rate + QE) which means we have pretty much hit a limit on the upside for bond prices, and thus the end of the rally that began around 1980. From here on in the yield you lock in today may well be bettered by the next bloke tomorrow on the same instrument. Fed tapering will be just the beginning, assuming we don’t fall into another black hole.
So the two investment themes that have served us reliably for at least twenty years are now evolving, just as surely as the telegram has given way to Facebook. This doesn’t mean investors should never again consider investing in BHP or government bonds, it just means today’s investor needs to adapt to a changing investment landscape.
Over the past ten years, the Russell report notes, investors exposed to a number of Australian assets have enjoyed a “triple treat” of investment returns, stemming from Australian shares, the currency, and residential investment property. Scott Fletcher, Director Client Investment Strategies Asia Pacific at Russell Investments suggests “Investors need to substantially adjust their expectations and revisit the traditional approach to investment and asset class diversification going forward”. Investors cannot “look in the rear view mirror” for guidance, he warns.
On one end of the investment scale we have government bonds, which are now at historically low yields, and on the other we have equities, which for many are simply too volatile to ponder. In between are a multitude of stock/bond choices, as well as alternative investments and other investment locations (eg emerging markets) which are far more accessible in today’s market. There is also property, investment in which today can be achieved in a number of different ways.
Australian investors need to start expanding their horizons. To download the full ASX-Russell report click here.
Technical limitations
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